Theresa May must still be prepared to call the EU’s Brexit bluff

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As the Brexit ‘war cabinet’ meets this morning to discuss what future trading relationship Britain would like with the EU there is a grim inevitability about the next few months. We know what we want – free trade with the EU, in services as well as goods, as well as free trade with the rest of the world. The EU, as it has made clear in recent days, has other ideas. Its plan is to allow us a Canada-style deal – a free trade deal in goods but not services, something which will be completely unacceptable to Britain, with our financial services-dominated economy. Moreover, it is going to try to impose punitive tariffs on British imports wherever it feels that UK regulation is unhelpful to EU industries. Given the EU’s clear victory in round one of the negotiations, in which we agreed to pay the EU’s leaving bill without guarantee of anything in return, Michel Barnier and his team are going to feel pretty confident of victory in round two as well.

All of which begs the question: is the government going to be prepared to use the one weapon it does have in its armoury: walking out of the talks? The price of calling the EU’s bluff, of course, is that we risk leaving the EU without a deal and revert to trading on World Trade Organisation (WTO) rules – which would mean tariffs on virtually everything we export to and import from the EU. To some, this is unthinkable. But is it really such a big deal?

A tariff is really just an import tax. If it is set at punitive levels then, like every other tax, it is indeed a killer of trade. But the tariffs which would be imposed on trade between Britain and the EU will in most cases – under the WTO’s rules – be of the order of a few per cent. Cars (9.8 per cent) and wine (18.5 per cent) – tariffs which would most affect EU exports to Britain – carry among the higher tariffs. It is bizarre that we hear so many people claiming that taxes of this level will kill off trade when those same people think VAT of 20 per cent is perfectly acceptable. Manufacturers outside the EU are already paying tariffs – they haven’t exactly killed off trade with China and Malaysia.

Non-punitive tariffs should be seen as just another form of government revenue. And, following Brexit, they really will be government revenue – unlike at present where the majority of revenue from tariffs raised on goods imported from outside the EU disappears into EU coffers. Tariff revenue could be used to reduce other taxes or to reduce the deficit.

Tariffs should be seen as a potential tool for capturing revenue from diverted profits – the process whereby companies shift liability for corporation tax to environments with low or in some cases zero corporation tax rates. It works like this: you import your coffee beans at an artificially high price or pay an overseas subsidiary a huge fee to use intellectual property. By doing so you reduce your profit in the country where the end product is sold and raise it in another country. Tax authorities have struggled to find ways of arresting this draining away of revenues. Tariffs should be seen as one part of a diverse tax system which makes it harder for businesses to escape tax liability.

And no, they don’t have to cause tailbacks at ports. We don’t have Customs and Excise men hovering round shop tills to collect VAT and there is no reason why they should directly be collecting revenue from tariffs, either. The revenue should be collected, just like other taxes, via tax returns, with audits to make sure businesses are complying.

The real barriers to trade are not tariffs set at moderate, revenue-raising levels: they are punitive tariffs and non-tariff barriers like regulations specifically designed to keep out foreign rivals’ goods. We shouldn’t allow the debate on Britain’s future relationship with the EU to be coloured by demands to keep trade totally tariff-free.

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